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Roy Smith: Market knows more

03/18/2011 @ 12:32pm

In the future, if one were to look up volatility in the dictionary a chart of today’s grain markets would probably come up. I do not remember a time in my farming career when there have been so many forces pulling grain prices in all directions. It all began with a less than spectacular corn crop in 2010. Concern that it was not big enough to fill demand stimulated a rally in the winter, when prices normally head lower. This leaves the market in a condition of needing a big crop in 2011 to build a supply cushion.


Just as the calendar was getting into the normal time for a spring rally, two more shocks hit the system. The first was unrest in the Middle East that threatened the supply of crude oil. As the market was trying to sort out the possible effects of a tight supply of oil, the Japanese triple disaster hit last week.

With three fundamental shocks to grain markets, it is difficult to know which direction prices will eventually end up going. A look at the corn futures market, in the last month, illustrates the affect these monumental factors are having. Since February 18, there have been four limit moves, two down and two up. Today, again, it is limit up. The soybean market has had only two limit moves, both lower. However, there have been two moves higher of more than 40 cents.   

One of my “Murphy’s Laws for Commodity Traders” states “The market knows more than the sum total of everyone watching it”. I think that principle applies to the current situation. The market cannot figure out which direction to go either. The end result is prices thrashing around in a wide range. Hopefully, it will not take another disaster to give direction to prices.

My solution to the situation is to divide the crop to be sold into increments and sell every week or two weeks until the middle of June. I look at the time between March 1 and June 30 as the idle time to sell those bushels that were not sold on the dead cat bounce. For awhile, it appeared that my theory of not selling in February might be wrong this year. This morning it does not look so bad.  A sale made at today’s price is still more than a dollar a bushel over the price at harvest last October.  

It is obvious from the volatility in the last month that no one knows the future of prices. In these conditions, knowing your estimated cost of production and making incremental sales when a good profit is available makes a lot of sense. Keep sales small enough that you can be flexible if prices continue higher. Until some of the fundamentals are more clear, there is almost surely more volatility ahead.

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